Out-Law / Your Daily Need-To-Know

Consultation launched into reliance of EU banks on credit ratings

07 Jan 2015, 11:25 am

A discussion paper on the use of credit ratings by financial intermediaries in the European Union has been published by the Joint Committee of the European Supervisory Authorities (JCESA), which includes the European Banking Authority (EBA).

The EBA said the paper aims to learn more from banks and financial institutions about their reliance on credit ratings in their contractual practice “outside of the cases in which reliance on ratings is required by the existing regulatory framework”.

The consultation, which ends on 27 February, will be used together with the results of a separate independent study to draw up “a first draft of possible alternatives to credit ratings”, the EBA said.

According to the discussion paper (35-page / 539 KB PDF), credit rating agency (CRA) regulations state that credit ratings should not be referred to by the EBA or other JCESA bodies, including the European Insurance and Occupational Pensions Authority or the European Securities and Markets Authority, in their guidelines, recommendations and draft technical standards “where such references have the potential to trigger sole or mechanistic reliance on credit ratings” by financial market participants including ‘sectoral competent authorities’ (SCAs).

In 2014, the JCESA agreed to start working on a second set of guidelines to “guarantee a harmonised application” of procedures for SCAs, the paper said. CRA regulations state that “over-reliance on credit ratings should be reduced and all the automatic effects deriving from credit ratings should be gradually eliminated”, the paper said.

Credit institutions and investment firms “should be encouraged to put in place internal procedures to make their own credit risk assessment and should encourage investors to perform a due diligence exercise”, the paper said.

A peer review report (105-page / 868 KB PDF) published in May 2014 by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, said that progress toward the removal of references to CRA ratings from standards, laws and regulation had been “uneven across jurisdictions and the financial sectors”.

In addition, the peer review said: “More work in the design of action plans is needed on the development of alternative standards of creditworthiness, the ways authorities will incentivise or promote own credit assessment processes, and the establishment of clear timelines for taking action.”